RE: Japan, Canada, Germany and Supply-Side, er, "Vertically stimu lative" fas...

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From: Zhang, Yangkun (Yangkun.Zhang@FMR.COM)
Date: Thu Oct 19 2000 - 07:17:50 PDT

> Mr. Zhang, if I am a clanging bell, what is Dick Cheney who credits recent
> welfare reform for our prosperity?

Though Mr. Cheney had an enviable record at the helm of HAL, he is certainly
not an economist. Having said that, Mr. Cheney is mostly correct, though he
should have qualified that while the proximate cause for the 3.9%
unemployment is the booming economy, the ultimate cause for the portion of
the structurally unemployed actually going out and seeking jobs can be
directly attributed to the welfare reform.

> back to your post:
> doesn't take a nobel laureate to recognize that reducing any tax should
> economic growth.

Incorrect. Reducing "any tax" will NOT help economic growth. In 1974, after
rampant inflation following the collapse of Bretton Woods, the closing of
gold window and the devaluation of the dollar, Robert Mundell (a Canadian
who later won a Nobel for his work on currency regions; see advocated a "$30 billion tax cut and the
temporary halting of open-market operations by the Federal Reserve to assure
monetary restraint." Mundell argued that "if this medicine is not taken
soon, there will be by mid-1975 more than seven million or even eight
million Americans unemployed, an inflation rate perhaps double the consensus
prediction of 7% per annum, and a huge budget deficit arising from the
recession-level tax revenues and widespread company and household
bankruptcies." Unfortunately, Mundell neglected to specify what kind of a
$30 billion tax cut was needed, leaving "the Ford administration to propose
a $50 tax REBATE for every taxpayer, with no change in the rate structure...
The rebate would have no positive supply-side effects, because the taxpayers
would be getting money back for work and investments they had already
completed!" It was $30 billion wasted with no stimulating effects to the
economy. "The error in legislating a $50 tax credit instead of a rate cut
may have cost Ford the presidency in 1976, when Democrat Jimmy Carter ran on
the theme that the U.S. tax system was 'a disgrace to the human race.' What
did Carter do when he was elected? He proposed another $50 tax credit." Not
until Reagan did a proper tax cut--that is, a cut of the margin rate,
especially that of capital gains--bring the American economy out of a decade
long malaise.

So any tax cut will not work. It has to be a marginal cut. For example,
George W. Bush's proposed cut of the marriage penalty is a waste of money,
and will have no positive effects on the economy. Especially horrifying is
Gore's proposed "targeted" tax cuts, which do little else than to waste a
lot of money without any economic benefit, and add yet another thousand
pages to tax code, continuing Robert Rubin's--whom National Taxpayers
Union's Executive Vice President rails against--legacy of enacting ever more
obfuscated tax codes all the while pushing even more people into the
wonderful arms of the AMT due to the necessity for additional itemized

> now address how wealth, not earnings, will be distibuted
> over decades, with ever-increasing tax-exempt clumpings at the very top.
> just backtrack thru the last 50 years. (you are glib with the macro
> for sure, especially international.)

Glad you mentioned wealth and not earnings, as I really don't feel like
rehashing all the statistics from JEC regarding income. I don't need to
backtrack 50 years, I can tell you right now that cuts in capital gains rate
will have little to no effect on wealth distribution as WEALTH IS NOT
TAXABLE unless it is realized as income. If you want to talk about the
effects of low margin rates on income, I shall point you to the JEC study
"Income Mobility and Economic Opportunity".

I would like to add one thing. There seems to be a misconception that
raising the margin rate soaks the rich instead of hitting the middle class.
This is not so. During 1960 to 1973, when the margin rate topped out at 80%,
"the widespread use of tax shelters probably meant that those high marginal
rates applied only to those lamebrains too cheap to buy the services of a
good tax attorney or accountant. As Lehman Brothers tax analyst Robert
Willens explains, the shelters involved hiding behind huge phantom losses
that could then be deducted against taxable income. A common shelter
involved leasing. You might buy a mainframe computer for $100,000, with a
$20,000 down payment and an $80,000 loan, and lease the equipment to a large
commercial bank. For its part, the bank would like the deal, since the
leasing rates were quite reasonable, coming as they were from someone far
more interested in saving on taxes than in driving a hard bargain. And the
tax savings was huge. You could write the $100,000 computer off at an
accelerated rate, with $25,000 deducted from taxable income in the first
year, $38,000 in the second year, and $37,000 in the third. You could also
take a 3 1/3% tax credit on that $100,000 investment, which meant $3,300
per year deducted not from income but from actual taxes paid. And of course,
you could deduct the interest on the $80,000 loan. Ten years later, the play
ended altogether with Reagan's 1986 Tax Reform Act. As Willens notes, it
neatly walled off all 'passive' losses from ordinary income, where passive
referred to income from a business activity that was not the individual's
real line of work. Since this meant that such losses could no longer be
deducted from ordinary income, a whole tax shelter industry was forced to
fold its tents." See

History shows that a higher tax does not soak the rich nearly as much as it
soaks the economy by concentrating all the productive efforts on tax
shelters instead of production. After all, according to the Congressional
Budget Office, for the rich "the bite from the personal income tax is about
the same as it was in 1979: 22.6% then versus 22.2% in '99, coming off a low
of 19.7% in 1989." Again, complexity of the tax structure added with ample
politicized targeted deductions will benefit no one except accountants and
tax attorneys and those whose finance afford them such services.

So in addition to a supply-side margin rate cut like the one being proposed
by candidate Bush, a real simplification of the tax codes to remove
loopholes are in order. Which means, get rid of all the politically
motivated obfuscation put in by Clinton/Rubin, and SIMPLIFY THE DAMNED CODE!

But let's take a look at how the wealthy got there. Let's for a second
assume "wealthy" means anyone who's a millionaire, so I'll quote from one of
my favourite books--The Millionaire Next Door:

The typical millionaire is someone who's 57 year old, married, and has three
children. 75% are self-employed. Most are in dull businesses such as welding
contractors, auctioneers, rice farmers, mobile-home park owners, pest
controllers, and paving contractors. The median family income is
$131,000--since this is for both husband and wife, I'm not sure how one
would split this for an individual. The average net worth is $3.7 million.
80% are first-generation affluent. 80% have a college degree. 18% have a MS.
8% a law degree. 6% have a MD. And 6% a Ph.D.

I won't rehash the entire book, but I'll just say that individual wealth
accumulation depends far more on "living beneath your means" than inheriting
wealth or hoping for a big tax break. Note that most of these people are buy
and hold types, and are not day-traders, and the bulk of their wealth is not
taxable anyway, REGARDLESS of how high the tax rate is, since wealth is not
taxable until you realize it as capital gains. There is a whole chapter in
the book devoting to the fact that the real wealth does not realize wealth
as income and hence reduce tax liabilities. Needless to say, there are many
chapters in that book, which should be read by everyone as a good guide on
wealth accumulation.

> btw, fascism is not marxism.

Okay, I agree. But where did that come from? I have never claimed that
fascism and Marxism are equivalent. Do you just enjoy putting words in
people's mouth or are you smoking something?

> i don't feel inclined at the end of a long work
> day to have to explain to you in analdetail (aspersions cast your way)
> differences.

Great--an American educated psuedo-intellectual on an AOL account who has
probably never experienced Marxism in real-life wants to educate me on
Marxism? For you information, I lived, breathed, and dreamt about
Marxism/Leninism/Trotskyism for NINE YEARS of my life (OH THANK GOODNESS I'M
IN AMERICA!--better pinch myself to make sure I'm not dreaming), and wrote a
paper on the finer points of Marxism and its derived thoughts about every
other month. I hardly need an education on Marxism!

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